Breakingviews - Big Weed is better off without Big Tobacco embrace

A man smokes as he waits in line for the opening of the Quebec Cannabis Society (SQDC) store, on the day Canada legalizes recreational marijuana, in Montreal, Quebec, Canada, October 17, 2018. REUTERS/Christinne Muschi

NEW YORK (Reuters Breakingviews) - Big ambitions require investment, but not all infusions of capital are equal. Cronos, the Canadian pot producer, is in early talks with Marlboro maker Altria, Reuters reported on Monday. An association with a huge tobacco company isn’t exactly what this nascent industry needs.

To say Cronos has expansion plans is an understatement. It wants to grow its crop of weed to more than 117,000 kg a year – just shy of $900 million a year in revenue terms, based on its latest realized price per gram. In the last quarter it sold just 514 kg. That’s not to say Cronos boss Michael Gorenstein can’t hit that target – but anyone buying his company’s shares, or those of equally driven rivals, is effectively getting some greenhouses and nurseries, supply agreements and a lot of hope.

Altria can take that risk. At over $100 billion in market capitalization, it could swallow the $1.8 billion Cronos with virtually no financial impact. Never mind that Cronos trades at more than 20 times its projected revenue for 2019, according to I/B/E/S/ estimates from Refinitiv. Meanwhile, for an industry with more enemies than friends, diversifying makes sense – much like Altria’s potential investment in vaping company Juul Labs, reported by the Wall Street Journal last week.

The trouble is, cannabis isn’t quite like tobacco, nor should it want to be seen that way. Producers aspire for their product to be seen as medicinal rather than lethal, for one. Much future usage won’t be smoked but eaten, taken as oils or even applied as cosmetics. Moreover, pot growers would prefer not to be regulated in the same draconian way as tobacco. Canada has already imposed strict curbs on how weed companies present logos and branding. In most U.S. states where usage is legal, a freer approach so far prevails.

In some cases, weed producers can be selective. Canopy Growth in August announced a $4 billion investment from brewer Constellation Brands, targeting a North American infused-beverage market Berenberg thinks could reach $13.2 billion. Others might turn to pharmaceuticals companies, or even personal-goods makers. Tobacco companies have cash and urgency, but their unmistakable aroma is something Big Weed can do without.

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